Representative Steve Drazkowski (R – Mazeppa) along with numerous Republican colleagues in the Minnesota House of Representatives have presented the state legislature with a proposal (HF 3594) which eliminates the state income and corporate franchise taxes, while also replacing the sales tax with a fair tax. However, the proposal was considered on an “informational only” basis in the House Tax Committee on April 21st. The bill is not being “laid over” for inclusion in the committee’s omnibus budget, and therefore, will not be voted on by the legislature or Tax Committee this session.
According to Pat Dalton, Minnesota House Staff Coordinator in the Research Department, the bill “should be viewed as a concept or framework bill.” In other words, this bill could serve as a model for tax reform taken up by the legislature in future sessions.
Fair tax will not be paid on the following: business inputs, investment purchases, spending on education, purchases by a non-profit to fulfill non-profit purposes, purchases by the federal government, purchases made with federal funds, and used property.
The fair tax can be considered a “consumption tax,” given that the taxpayer pays tax on what they consume, rather than what they currently own or have. In other words, tax is paid on purchases at the point of sale.
If this version of the bill were to pass in the future, state imposition of individual and corporate franchise tax, sales tax, insurance tax, and occupation tax would be prohibited. According to the bill, the tax revenue the state loses by the elimination of those taxes “shall be replaced by the levy and imposition of a sales tax upon all final use or consumption of taxable property or taxable services.” This “sales tax” will be renamed the “Fair Tax.” Under this current bill, the Commissioner of Revenue would set the Fair Tax rate to make sure the new tax is revenue neutral to that of the taxes that would be eliminated.
Those who argue against a Fair Tax say that it is regressive, however, this bill provides a caveat that many would argue makes it less regressive. A monthly credit would be given for those living at the poverty line based on household size, equal to that they have paid in Fair Tax. In other words, the bill ensures that those living in poverty continue to pay little to no taxes.
David Boone, District Director (MN-01) of Americans for Fair Taxation argued in his testimony before the House Tax Committee that the American income tax is broken, and that “the fair tax is the answer.” Boone went on to say, “The fair tax is not a flat tax,” adding, “It’s not reform, its replacement [of the tax system].”
DFL Minority Leader Paul Thissen voiced his distaste for the tax in a press release, asserting, “It is disturbing that with less than five weeks to go in the session the House Republican Tax Chairs are making it a priority to consider an extreme bill that would raise taxes on ordinary Minnesotans.”
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